Tony Windsor strikes back – Barnaby in the spotlight

One the great things about the interwebs is that debate rolls in every direction and with some basic tools everyone can take part.

Below this article on Macrobusiness a negative gearing debate bubbled up (as they tend to do) with one contributor posting a link to an article that he had written on the issue arguing against changes to the regulations concerning negative gearing.

That prompted the Glass Pyramid to post a response on Macrobusiness responding to the cross linked article. That response is reproduced below.

All part of the fun of life on the interwebs

PFH007 (click on this link to the comment in context on Macrobusiness)

Jordan,

A good read and as someone who prefers that we deal with the causes rather than the symptoms I have a lot of sympathy for those who believe that we should not start with restricting the ability of people to claim losses on one investment against other income – from either other investments or wage and salary.

However, there are a couple points in your post that I disagree with.

Grandfathering is not unfair. Right or wrong people have planned their finances on the basis of the existing state of affairs and that includes the ability to claim any losses against other income. We should only be talking about a prospective change – if for no other reason that the people rightfully upset about the change will present a massive political obstacle.

Plus they don’t get to keep the deal for ‘perpetuity’ – they only get to claim losses against other income for as long as they have losses on the investment and there is little point in continuing to do that if the expectation of excessive capital gains fades. As you note the expectation of excessive gains on existing property are like to subside if new investors in existing property cannot claim losses against wage and salary income.

Those who wish to be able to claim losses on investment property against other income, whether they be rich or poor, will be able to do so if they buy new property. But realistically this will only happen if the prospects of large capital gains on new property appear likely and that is also very doubtful as new housing, like new cars, tends to lose value once it has lost that new house smell. So investors in new housing are likely to be rental yield bounty hunters.

You say that tilting the table towards new builds might result in an oversupply. Well the vacancy rates in most Australian capital cities across a range of housing stock demonstrate that an oversupply is not a current problem and has not been a problem in recorded memory. Lets worry about that if it happens – oversupply is something often spoken of but rarely seen. And if it does happen, it will be a temporary issue and one that is easily dealt with by allowing a few more migrants or refugees in for a few months.

Building for the sake of building is not solution but it is a solution to a problem that currently exists – cat’s bum tight vacancy rates across the country.

The issue of who gets the benefit of the losses claimed against other income is a red herring. The issue is not really who gets to claim those losses and whether they are rich or poor. The point is that claiming those losses is just a small part of why people invest in property. They are not investing to have up to half their losses repaid by the tax man. They are investing in the hope of making excessive capital gains. Limiting their ability to reduce their losses along the way to excessive capital gains takes some of the sweetness out of the deal but the big money they are after remains the capital gains and it likely that excessive investment in real estate will continue while the promise of those gains appears likely. And as we know the main determinant of that is in the hands of the RBA and APRA and how much cheap bank created money they allow to be sprayed in the direction of the property market.

And that is ultimately why fiddling with negative gearing is not going to pop any bubble.

At best it will knock a bit of foam off the property investors beer and reduce the rate of increase of property prices – maybe.

Even the reduction in the CGT discount may only knock a bit more foam off – after all a discount on 25% of the gain is better than no discount at all.

Ultimately the only things that can really pop the bubble are:

1. The RBA and APRA forcing up the price of house hold debt and that seems unlikely as they love their household debt bubble.

2. The demand of households to hold debt crashes – regardless of how tempting the RBA drives the mortgage debt “bait rates”.

3. There is an oversupply of property across a range of markets – and that is not something to be worried about as a bit of oversupply will help maintain downward pressure on prices and if we got really worried about it we can fix that with some migration or humanitarian intake.